Ever since former Reserve Bank of India Governor, Dr. YV Reddy mentioned the words “financial inclusion” in his 2005 speech, the words became common parlance in the government and at the RBI. The 11th Five Year Plan (2007-12) documented that significant segments of the Indian population had been excluded from the growth over the previous decade and called financial inclusion a top priority.
The extent of financial exclusion remains staggering. Out of 600,000 villages in the country, only about 30,000 have a commercial bank branch. Till recently, more than 50% of India’s population did not have any bank account and more than half of the total farmer households did not seek credit from either institutional or non-institutional sources of any kind.
In 1934, government policymakers made the RBI statutorily responsible for the development of the agriculture sector, to ensure adequate credit was available in an organised manner. The first major initiative was taken in 1955 when the Imperial Bank of India was nationalised to what became the State Bank of India. This was followed by the nationalisation of 14 major commercial banks in 1969.
Several measures were taken in subsequent years, such as mandating banks to lend to small-scale industries, agriculture sector and to small borrowers; opening of bank branches in rural areas; introduction of Lead Bank Scheme; the 20- Point Economic Programme and the Integrated Rural Development Programme.
None of the above measures, however, have had much impact. As per the findings of RBI’s 2009 High Level Committee, the Lead Bank Scheme has been a failure since a large section of the rural population and the urban poor do not have access to banking facilities.
Public sector banks routinely fail to achieve their targets of loans to the agriculture sector. In the name of reforms, banks have been allowed to close rural branches. The latest Jan Dhan Yojana scheme by public sector banks has recently been touted for its success. But of the new 17 crore Jan Dhan accounts, almost 50% are non-operational. How can this be considered success?
The RBI recognises this failure and has set up another committee to determine ways to expedite financial inclusion. The committee must consider reviving the core mission of public sector banks — to serve rural, unbanked areas, lend to the poor at affordable interest rates and disband agents who charge usurious rates.
The committee must assign this mission to the public sector, because private sector goals are fundamentally focused on profits rather than serving the poor.
(KL Khetarpaul is a former executive director at the Reserve Bank of India. The views expressed are personal)